Fitch Affirms Southern California Public Power Auth Wind Project Bonds at 'AA-'; Outlook to Positive
Fitch Ratings has affirmed the 'AA-' rating on the following outstanding
Southern California Public Power Authority (SCPPA) bonds:
--$137.4 million (Milford Wind Corridor Phase II Project) revenue bonds
series 2011-1;
--$121.8 million (Linden Wind Energy Project) revenue bonds series 2010A
and 2010B;
--$427.4 million (Windy Point/Windy Flats Project) revenue bonds series
2010-1).
The Rating Outlook is revised to Positive from Stable.
SECURITY
The SCPPA bonds are payable solely from revenues received from the two
members participating in each project: the Los Angeles Department of
Water and Power (LADWP) and Glendale Water & Power (GWP; together the
members). Pursuant to the SCPPA power supply agreements for each of the
three wind projects, the members are unconditionally obligated for their
respective share of the project costs (including debt service). Step-up
provisions require LADWP to pay the full project costs in the event of
non-payment by GWP.
KEY RATING DRIVERS
POSITIVE OUTLOOK REFLECTS PARTICIPANT CREDIT QUALITY: The ratings on the
bonds are directly linked to the credit quality of LADWP (power revenue
bonds rated 'AA-'/Outlook Positive). The Positive Outlook on these
revenue bonds reflects Fitch's revision of the Outlook to Positive on
LADWP's power revenue bonds on April 28, 2016.
RENEWABLE WIND ENERGY PROJECTS: The three projects are operating wind
projects located in Utah and Washington that provide renewable energy to
LADWP and are essential to meeting California's renewable portfolio
standard.
UNCONDITIONAL TAKE-OR-PAY AGREEMENTS: Bondholders are secured by
absolute and unconditional 'take-or-pay' power supply agreements that
extend for the life of the bonds with the two members, LADWP and GWP
(rated 'A+').
STEP-UP PROVISIONS OBLIGATE LADWP: The agreements provide additional
support through the inclusion of step-up provisions (20% for Milford II,
and 100% for Linden and Windy Point) that require LADWP to pay full
projects costs in the event of a payment default by GWP. LADWP's
obligation to pay is on parity with other similar off-balance sheet
obligations and its own outstanding power revenue bonds.
RATINGS DRIVEN BY LADWP RATING: The project ratings are driven by the
rating and underlying credit quality of LADWP. LADWP's credit
characteristics include a strong and diverse service area with over 1.5
million customers, a unique and adjustable rate structure, strong
financial margins, above average debt levels and large ongoing capital
needs.
RATING SENSITIVITIES
CHANGES IN LADWP CREDIT QUALITY: The ratings are based on the credit
quality of Los Angeles Department of Water and Power (LADWP) and the
unconditional obligation of LADWP to pay debt service on the bonds.
LADWP's ability to demonstrate continued strong financial margins during
the ramp-up of increased capital spending in the next two years will
likely result in a rating upgrade of its power revenue bonds as well as
the SCPPA wind project revenue bonds.
CREDIT PROFILE
SCPPA is a joint-action agency that owns and operates electric
generation, transmission, and physical gas assets on behalf of its 12
members consisting of 11 municipal electric utilities and one irrigation
district all located in southern California. All of SCPPA's projects are
financed and secured on an individual project basis. There is no other
source of revenues for each of the SCPPA projects than the payments made
directly from those members that participate in each specific project.
SLIM FINANCIAL MARGINS TYPICAL FOR JOINT ACTION PROJECTS
As a joint-action agency, SCPPA and its associated projects report slim
financial margins, as payments from members are meant to only cover
associated costs. Debt service coverage is typically slightly above
1.0x, which is the case for each of the three wind projects.
MILFORD II WIND ENERGY PROJECT
The Milford II wind energy project is a 102 megawatts (MW) nameplate
capacity wind generation project located near Milford, Utah. SCPPA used
bond funds to prepay for a fixed amount of energy from the project to be
delivered over 20 years between 2011 and 2031. The project began
commercial operation on May 2, 2011. The phase II project is an
expansion of the Milford Phase I project (a 203.5 MW project) the output
of which is also dedicated to LADWP and GWP through a separate prepaid
arrangement.
The project's transmission access directly into California makes the
energy eligible as an 'in-state' resource under California's renewable
portfolio standard requirement. The two phases of the Milford project
share transmission capacity in an 88-mile transmission line that
connects into the Intermountain Power Project (IPP) switchyard, a
facility in which LADWP owns transmission capacity rights via its IPP
agreements. These agreements currently expire on June 15, 2027 (prior to
the final maturity on these bonds on July 1 2031). Although SCPPA is
working to extend these rights, its payment obligations to bondholders
is not dependent on its ability to deliver the energy.
The capacity factor of the project was 19.7% in fiscal 2015 and has been
below the initial project estimate of 25.9% since commercial operation.
The annual energy output fell below the minimum amount (183,900 MWh
annually) required in fiscals 2013 and 2015. The contract permits for
make-up deliveries in future years, but if the project owner ultimately
fails to perform SCPPA has a security interest in the project.
LINDEN WIND ENERGY PROJECT
The Linden wind energy project is a 50 MW project located in Klickitat
County, Washington. The project was developed by Northwest Wind
Partners. The project was purchased on Sept. 14, 2010 and is owned by
SCPPA and operated by EnXco. Transmission is provided via long-term
contracts with Klickitat Public Utility District, WA and the Bonneville
Power Administration.
Since the project was purchased prior to June 1, 2010, it is a
grandfathered project under California's renewable portfolio standard.
This designation allows the energy from a grandfathered project to
reduce the amount of total renewable energy needed to be in compliance
with the three compliance categories (often referred to as 'buckets').
Project performance has been good since commercial operation began on
June 30, 2010, with capacity factors of 34.1% and 28.9% in fiscals 2014
and 2015, respectively. Cost of the energy has ranged between 11.6 cents
and 13.8 center per kWh over the last three years. The project is owned
by SCPPA, and therefore there are no minimum delivery amounts.
WINDY POINT/WINDY FLATS POWER PROJECT
The Windy Point/Windy Flats Power Project is one of the largest wind
farms in the United States, spanning 26 miles along the Columbia River
ridgeline in Washington. The 262.2 MW project consists of 114 wind
turbines that have been fully operational since March 2010. The project
was developed by Windy Flats Partners, LLC (an affiliate of the Cannon
Power Group). Cannon Power Group is the project operator as well.
Transmission is provided via long-term contracts with Klickitat Public
Utility District, WA and the Bonneville Power Administration.
Similar to the Linden project, the energy is grandfathered under
California's renewable portfolio standard. Operations have been good
with capacity factors of 29.7% and 25.4% in fiscals 2014 and 2015,
respectively. The seller has consistently provided the annual minimum
delivery to SCPPA of 555,393 MWh in each year of operation.
LAYOFF AGREEMENTS BETWEEN GWP AND LADWP
SCPPA has sold its rights to prepaid energy from Milford II under power
sales agreements to LADWP (95.098%) and GWP (4.902%). SCPPA has sold the
output of the Linden project to LADWP (90%) and GWP (10%). The output of
Windy Point is contracted to LADWP (92.37%) and GWP (7.63%) as well. GWP
has contracted the sale of its share from the three projects to LADWP
for the term of each project sales agreements. The result is that LADWP
pays 100% of project costs, including debt service.
SECURITY INTEREST IN THE EVENT OF NON-PERFORMANCE
SCPPA has a perfected first lien and priority security interest in the
Milford II and Windy Point/Windy Flat facilities under the terms of the
project purchase agreements that would allow SCPPA to take the assets in
the event the seller is unable to meet its obligations under the power
purchase agreement. SCPPA also has early buy-out options at certain
dates for each of the three projects but the purchase would not change
LADWP or GWP's obligations to continue paying debt service on the bonds.
The Linden project is already owned by SCPPA.
LADWP CREDIT QUALITY IS STRONG
LADWP is the largest city-owned municipal utility in the United States
with 1.5 million electric customers. For more information on Fitch's
rating for LADWP's power system, see 'Fitch Rates Los Angeles, CA Power
Rev Bonds 'AA-'; Outlook Positive' dated April 28, 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003686
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003686
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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